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Thoughts on Index-weighted v equal-weighted ETFs?

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Thoughts on Index-weighted v equal-weighted ETFs?

Hello Team, I would like to add a question to the weekly Q&A list. Could you please give your opinion on index-weighted v equal-weighted ETFs (for example A200 v MVW)? I understand the difference, and I would like to ask about the advantages and disadvantages of both in different economic backdrops. Would one be expected to perform better if inflation persists, or if inflation falls, during times of strong economic growth, or recession? Any thoughts greatly appreciated. Thanks. Note: I am not asking specifically about A200 v MVW, but more in a general sense of index-weighted v equal weighted ETFs - the underlying index could be anything. Thanks, Richard H

Answer

Hi Richard,

Historically equal weighted funds have produced superior returns to index weighted but they also come with higher volatility.

In terms of which one is likely to perform better during different periods of inflation I would simply revert to history:

  • During  both recent periods of rising inflation perceived declining inflation  I would prefer the equal weight ETF.

However I stress there is very little in it, the trend is equal weighted have outperformed over longer timeframes and during the up / down swings over recent times hence our KISS conclusion.

 

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